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Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities

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  • Noh, Yong-Hwan
  • Moschini, Giancarlo

Abstract

We analyze the potential entry of a new product into a vertically differentiated market. Here the entry-deterrence strategies of the incumbent firm rely on “limit qualities.” The model assumes quality-dependent marginal production costs and considers sequential quality choices by an incumbent and an entrant. Entry-quality decisions and the entry-deterrence strategies are related to the fixed cost necessary for entry and to the degree of consumers’ taste for quality. We detail the conditions under which the incumbent increases its quality level to deter entry. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well. Welfare is not necessarily improved when entry is encouraged rather than deterred.

Suggested Citation

  • Noh, Yong-Hwan & Moschini, Giancarlo, 2006. "Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities," ISU General Staff Papers 200611010800001442, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:200611010800001442
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    Cited by:

    1. Kuo, Chia-Wei & Xiong, Hui & Chen, Ying-Ju & Chang, Ting-Kai & Wu, Shining & Chang, Yung-Hsun, 2024. "Vertical product line extension when online retailers serve as mom-and-pop stores’ suppliers," Omega, Elsevier, vol. 122(C).
    2. Sreya Kolay & Rajeev K. Tyagi, 2022. "On the Effects of Raised Rival’s Costs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(4), pages 567-586, June.
    3. Föllmi, Reto & Schetter, Ulrich & Torun, David, 2022. "Gravity with History: On the Aggregate Implications of Incumbency Effects in International Trade," VfS Annual Conference 2022 (Basel): Big Data in Economics 264136, Verein für Socialpolitik / German Economic Association.
    4. Cesaltina Pacheco Pires & Sílvia Ferreira Jorge & Margarida Catalão‐Lopes & Joana Pinho & Pedro Garcês & Adriana Alventosa, 2024. "Market configurations when marginal costs are quality‐dependent," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 45(6), pages 3972-3992, September.
    5. Stoneman, Paul, 2011. "Soft Innovation: Economics, Product Aesthetics, and the Creative Industries," OUP Catalogue, Oxford University Press, number 9780199697021.
    6. Jochen Manegold, 2016. "Stackelberg Competition among Intermediaries in a Differentiated Duopoly with Product Innovation," Working Papers CIE 98, Paderborn University, CIE Center for International Economics.
    7. Montez, João & Marxen, Annabelle, 2020. "Licensing at the patent cliff and market entry," CEPR Discussion Papers 14276, C.E.P.R. Discussion Papers.
    8. Sai Zhao & Lei Fang, 2023. "Debt financing, first‐mover advantage, and vertical product differentiation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 502-514, January.
    9. Ya‐chin Wang & Leonard F.s. Wang, 2009. "Equivalence Of Competition Mode In A Vertically Differentiated Duopoly With Delegation," South African Journal of Economics, Economic Society of South Africa, vol. 77(4), pages 577-590, December.
    10. Peter Egger & Reto Foellmi & Ulrich Schetter & David Torun, 2023. "Gravity with History: On Incumbency Effects in International Trade," Growth Lab Working Papers 219, Harvard's Growth Lab.
    11. Karaer, Özgen & Erhun, Feryal, 2015. "Quality and entry deterrence," European Journal of Operational Research, Elsevier, vol. 240(1), pages 292-303.
    12. Amit Gayer, 2023. "Duopoly and Endogenous Single Product Quality Strategies," Games, MDPI, vol. 14(4), pages 1-11, August.
    13. Soyk, Christian & Ringbeck, Jürgen & Spinler, Stefan, 2021. "Effect of long-haul low-cost carriers on North Atlantic air fares," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 152(C).
    14. Sang-Ho Lee & Ram Kumar Phuyal, 2013. "Strategic Entry Deterrence by Limiting Qualities under Minimum Quality Standards," The Japanese Economic Review, Japanese Economic Association, vol. 64(4), pages 550-563, December.
    15. Balan, David J. & Deltas, George, 2013. "Better product at same cost, lower sales and lower welfare," International Journal of Industrial Organization, Elsevier, vol. 31(4), pages 322-330.
    16. Amit Gayer, 2024. "Monopoly and Quality Omission," Games, MDPI, vol. 15(6), pages 1-12, October.
    17. Nie, Jiajia & Zhong, Ling & Li, Gendao & Cao, Kuo, 2022. "Piracy as an entry deterrence strategy in software market," European Journal of Operational Research, Elsevier, vol. 298(2), pages 560-572.
    18. Peter-J. Jost, 2023. "Price commitment and the strategic launch of a fighter brand," Quantitative Marketing and Economics (QME), Springer, vol. 21(3), pages 381-435, September.
    19. Peter-J. Jost & Stefanie Schubert & Miriam Zschoche, 2015. "Incumbent positioning as a determinant of strategic response to entry," Small Business Economics, Springer, vol. 44(3), pages 577-596, March.
    20. Liang Lu, 2015. "Proliferation and Entry Deterrence in Vertically Differentiated Markets," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2015-06, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    21. Prasad Krishnamurthy, 2025. "A simple model of natural oligopoly with an unlimited number of firms," Economics Bulletin, AccessEcon, vol. 45(2), pages 896-909.
    22. Joshua S. Gans & Vivienne Groves, 2012. "Carbon Offset Provision with Guilt‐Ridden Consumers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(1), pages 243-269, March.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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